Firms like Goldman and others have large proprietary positions that can never, in my opinion, be divorced from providing liquidity for customers. This is not in and of itself a negative, as it can be argued that having large positions can help facilitate large customer trades. On the other hand, traders can use customer information to do things like ‘front run’, which is unethical. Traders cannot do their jobs by just bidding and offering securities to their customers without having positions. This is what the public and government regulators do not seem to understand. That has been the way traders have operated for DECADES. You have to take positions and, in fact, your customers should, in general, want you to. Their job as customers is in part to figure out who on the street has positions in what they want to buy so they can ask you to make an offering. Conversely, if they want to sell something, the best buyer is likely the one who is short that security. This is where a talented salesperson comes in who has a long-term relationship with the client. That person helps to bridge the divide between what his client may want and what his trading desk is positioned to do. The most common question asked every single day to me for 10 years as a trader was: ‘what is your axe?’ Meaning what are you the best buyer or seller of today? What this does is allow the salesperson to go to his client and let him or her know what her trader wants to do and thus become the best buyer or seller of. This is called a win/win. This approach worked when there was relationship and that relationship was based on telling the truth.
These same leaders fought against promoting the commercial animal/jerks and often won. That made me happy. For both categories of people, there was frequently a fight and the more powerful leaders’ candidate often won. Not surprisingly, partners who were great culture carriers generally had people working for them who were as well and vice versa. What made the firm GREAT for so long is that one held the other in check. You need people who are very commercial but they cannot dominate or you risk the outcome that Mr. Smith described….If you promote people into leadership roles who are bad people, the outcomes will be bad over the long term. If you promote people who are all about their paycheck, the culture will be all about the paycheck.
Hedge funds are not good or bad, but my experience has been that they are less open to sharing information. They trust the street less. They are truly paid on how much money they make, more so then the average street trader or institutional customer. In discussion with many a hedge fund manager, they often say ‘we treat Goldman and any other firm like another hedge fund.’ In other words, we don’t trust them, think they are only out to make money for them.